The RBI in a statement said though risks are evenly balanced around the inflation trajectory at the current juncture there are upside risks to the baseline projection. The RBI cited “uncertainty surrounding the outcome of the south west monsoon in view of the rising probability of an El Nino event around July-August, and its implications for food inflation.” (See highlights here)
The central bank also said “a prominent risk could emanate from managing the implementation of the allowances recommended by the 7th central pay commission. In case the increase in house rent allowance as recommended by the 7th CPC is awarded, it will push up the baseline trajectory by an estimated 100-150 basis points over a period of 12-18 months.
“Another upside risk arises from the one-off effects of the GST,” the RBI added.
The RBI also announced it would raise the reverse repo, the rate at which RBI borrows money from banks by 25 basis points to 6.00 per cent, narrowing the gap between the repo and the reverse repo to 25 bps. Analysts say this is incrementally positive for banks. The banking sub-index of National Stock Exchange erased its early losses as banking shares gained post this announcement.
The RBI projects consumer inflation to average 4.5 per cent in the first half of the year and 5 per cent in the second half.